5 Lessons From Oil Spills and Reform Bills

Technology is a loaded gun, smart people often aren't, and self-reliance is more important than ever.


There are days when a glance at the headlines can make you wonder: Is anything going right?

A few things are. Gasoline remains affordable, 4G is rolling out, and pay on Wall Street has finally followed the bankers' performance downward. Still, there are times when America feels like Rattletrap Nation, in constant need of repair. An army of workers battles a gargantuan oil spill that seems likely to pollute the Gulf of Mexico for years. In Washington, legislators and lobbyists battle over financial reforms that may or may not fix a culture of greed that wrecked the economy. Meanwhile, government itself seems broken, as elected officials dicker over trivialities that don't matter to most Americans and continue to spend money the nation doesn't have.

[See 10 companies back from the brink.]

Distressing, yes, but there are some commonalities in these breakdowns that should help us understand what to do about them. And if they don't improve public life, they can still enhance our personal decision-making in a scary economy. Here are five things that recent calamities have taught us about life in the 21st century:

Technology can backfire. BP has the capability to operate complex machinery a mile deep in the ocean—but not to do damage control when something goes wrong. Wall Street traders rely on superfast computer programs that can execute millions of trades per second—but can't stop a panic or evaluate what everybody else's supercomputers are doing. Technology has clearly enhanced modern life, but it has also created powerful and dangerous capabilities that we've harnessed poorly and don't fully understand. Business guru Tom Peters even sees technology as a vulnerability. "I ask companies: Can you run your company for a month without a computer?" he said at a recent conference in New York. "Think of a cyberattack. It's coming and when it does, we're chopped liver. We have become non-resilient as a nation."

[See why the Gulf Oil spill will barely affect most Americans.]

The tension, of course, is between the efficiency and speed that technology allows, and the need for a margin of safety and security that isn't always obvious. Regulators will always battle with financial firms, oil companies, automakers, and other private enterprises that take the lead in exploiting technology and don't always worry about the risks. Consumers face analogous decisions. Should you store key personal data in the Internet "cloud," as Google hopes you will? Should you get rid of the hard-wired landline phone you rarely use, and rely on your cell phone if there's a prolonged power outage some day? Is it safe to go completely paperless? The forces of progress say yes, and it's a compelling argument. Until…

Smart guys can be really dumb. It takes a lot of specialized know-how to design oil-drilling submersibles or construct a synthetic collateralized debt obligation. And smart people do create many things that solve problems and make life better. But brilliant innovators—especially technology mavens—tend to fixate on the immediate challenge while overlooking second-order effects and eventualities that are just plain hard to anticipate when you're doing something new and unproven. A major failing of some of the Wall Street "financial engineers" who developed exotic derivatives that blew up was that they didn't consider what would happen when other geniuses did the same thing and risks that seemed manageable at one firm became overwhelming when they metastasized throughout the system. The solution isn't limiting innovation. It's applying skepticism to "breakthroughs" and moving slowly enough to manage unanticipated problems before they get magnified and become catastrophes.

[See 6 strains on your financial future.]

There's virtue in simplicity. There's a major problem with the healthcare reform enacted by President Obama and his Democratic allies in Congress: It's nearly impossible to understand. The new law may very well benefit Americans, on balance, but for now it's mainly causing anxiety among small businesses and others directly affected by it, which in turn is fueling lasting opposition and souring voters on anything the government wants to do. Some of the financial instruments that contributed to the banking meltdown were so complicated that the CEOs of the firms that issued them didn't even know what they were. Government regulators were even deeper in the dark.

Warren Buffett likes to say that he only invests in businesses he understands. That sounds like a blindingly obvious guideline, yet in recent years there have been school districts that invested in exotic derivatives, borrowers who signed on to complicated mortgages without knowing the interest rate would balloon in a year or two, and government regulators who simply nodded their heads, probably because nobody wanted to seem dumber than the geniuses peddling these monstrosities. We need to nod our heads more frequently in the opposite direction—side to side—and ask stupid questions until we're sure we know what we're getting into.

You're on your own. There was a sizeable government apparatus in place to protect consumers—before the financial meltdown!—and it failed completely. Now, reformers in Washington seem intent on creating even more consumer-protection agencies that will keep us from doing stupid things. The intent is understandable, but there will always be hucksters preying on gullible consumers and finding ways around the fraud police. Government should patrol the high-level things that no consumer can control—like exploding oil rigs and synthetic CDOs—but an ever-expanding consumer-protection complex could make Americans more vulnerable, not less, since it dulls the instincts that motivate people to look out for themselves in the first place.

[See why voters will get a lot angrier.]

Modernity is a myth. Societies continually learn that they're not as evolved as they think they are. A century ago, Europeans thought they had finally outrun the territorial wars that brought needless destruction. Then World Wars I and II erupted. In recent years we convinced ourselves that modern economics had tamed the boom-bust cycle, that technology had reduced financial risk, and that large-scale bank failures were no longer possible. Ha. The many reforms now percolating in Washington are supposed to steer us into a more stable future, where plunderers are reined in and regulatory councils make sure nothing terrible happens. Maybe. But you'll be excused if you stockpile rice and beans in the basement and keep a wad of cash on hand. Just in case BP or Citigroup or the Consumer Financial Protection Agency don't answer when you call for assistance.